Awash with oil and plenty more to come

George Trefgarne says there’s no need to worry about recent dramatic swings in oil prices: despite Opec production cuts, there’s ample supply for a new era of cheap energy

It must be quite boring to be a crewman on the curiously named Front Queen, an oil tanker reportedly moored off the sweltering coast of Malta. This vessel was chartered a couple of weeks ago by one of the few healthy banks in the world, JPMorgan Chase, in order to sit in the baking sun of the Mediterranean, filled with heating oil, in the hope that the price goes up.

The Front Queen is not alone. There is currently about 70 million barrels’ worth of crude, or nearly one day’s global production, bobbing about in ships around the world. That number has actually come down slightly in the last few weeks, but the point remains. Contrary to what you might hear from advocates of so-called ‘peak oil’ — the idea that we’re running out of the stuff — the world is currently awash with it. So much so, in fact, that we could be about to enter a new era of cheap and abundant energy.

The case for a high oil price is simple and goes like this: members of Opec control a third of world production. They have cut output to prop up the price — while rising demand from emerging nations is outpacing declining demand from the increasingly green-minded and recession-hit West. But the opposing case, for a low oil price, is becoming more compelling. Spare production capacity is growing all the time. Indeed, there are approximately six million barrels of spare capacity in the market, the highest level for a decade and about 7 per cent of available production. That spare-capacity number is growing all the time. Add in the effects on demand of a prolonged recession, and Opec is trying to catch a falling knife.